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Bayh-Dole Supreme Court Decision

Posted May 16, 2011

In a 7-2 decision, the Supreme Court has ruled that a federally funded contractor does not necessarily own the patent rights to inventions resulting from funded projects. Here, the Board of Trustees of the Leland Stanford Junior University unsuccessfully argued that such rights automatically vest under the Bayh-Dole Act of 1980.

Ownership of patent rights and inchoate pre-filing rights are somewhat confusing because they involve a mixture of federal patent law and state laws of contracts, employment, and trade secrets. Here, the majority led by Chief Justice Roberts has held that US patent rights have always (since 1790) initially vested in "the inventor" and that the non-specific language of the Bayh-Dole Act does nothing to change the original setup.

The Bayh-Dole Act has revolutionized the way that universities look at technology and innovation by allowing research institutions to "elect to retain title" to inventions generated through federal funding. 35 U.S.C. § 202(a). Today, most major research universities hold dozens if not hundreds of patents and have extensive licensing offices. The Association of University Technology Managers (AUTM) now boasts more than 3,500 members.

This case involves a Stanford researcher (Mark Holodniy) who was under a prior contractual duty to assign invention rights to Stanford but who actually assigned rights to Cetus. When Stanford sued Roche (Cetus' successor in interest) for patent infringement, Roche's defense was that a co-owner could not be held liable for patent infringement. The Court of Appeals for the Federal Circuit agreed with Roche -- holding that Holodniy's duty to assign rights to Stanford did not block him from actually assigning rights to Cetus and that Roche therefore held rights in the invention.

At the Supreme Court, Stanford argued that the contractual rights did not matter and instead that its statutory right to "elect to retain title. . . any invention of the contractor" conceived or reduced to practice under a federally funded agreement gave it precedence over Cetus/Roche. The court rejected Stanford's argument as both against the tradition of patent law and not in accord with the statute.

Stanford's reading of [the Statute] is plausible enough in the abstract; it is often the case that whatever an employee produces in the course of his employment belongs to his employer. No one would claim that an autoworker who builds a car while working in a factory owns that car. But, as noted, patent law has always been different: We have rejected the idea that mere employment is sufficient to vest title to an employee's invention in the employer. Against this background, a contractor's invention—an "invention of the contractor"— does not automatically include inventions made by the contractor's employees.

This case is largely a moot point because the Federal Circuit has established a particular federal-patent-law interpretation of employment agreements that allows contracting parties to choose language that optionally includes either a promise to cooperate and assign rights or else an automatic assignment that occurs constructively at the moment of invention. If Stanford had chosen the more stringent automatic assignment language for its employment contract, then it would have automatically taken rights. The only problem, of course, is whether Universities have the bargaining power to require its employees to sign the more stringent contracts.

At the same time, however, the decision here offers some cause for caution in relying fully on the Federal Circuit's usurpation of exclusive jurisdiction over this employment and contract law issue. In Footnote 2, the Supreme Court noted that, in this decision, the court had "no occasion to pass on the validity of the lower court's construction of those agreements." As discussed below, Justice Breyer explicitly criticized the Federal Circuit's contract interpretation.

In dissent, Justice Breyer wrote:

Ultimately, the majority rejects Stanford's reading (and the Government's reading) of the Act because it believes that it is inconsistent with certain background norms of patent law, norms that ordinarily provide an individual inventor with full patent rights. But in my view, the competing norms governing rights in inventions for which the public has already paid, along with the Bayh-Dole Act's objectives, suggest a different result.

Breyer also challenged the Federal Circuit rule distinguishing between a promise to transfer and an automatic transfer agreement. Relying upon history and tradition, Justice Breyer saw the initial contract as creating equitable title in the invention and then looked to old decisions historically did not enforce contracts to automatically transfer of legal title to patent rights.

Given what seem only slight linguistic differences in the contractual language, this reasoning seems to make too much of too little. Dr. Holodniy executed his agreement with Stanford in 1988. At that time, patent law appears to have long specified that a present assignment of future inventions (as in both contracts here) conveyed equitable, but not legal, title. See, e.g., G. Curtis, A Treatise on the Law of Patents for Useful Inventions §170, p. 155 (3d ed. 1867) ("A contract to convey a future invention . . . cannot alone authorize a patent to be taken by the party in whose favor such a contract was intended to operate"); Comment, Contract Rights as Commercial Security: Present and Future Intangibles, 67 Yale L. J. 847, 854, n. 27 (1958) ("The rule generally applicable grants equitable enforcement to an assignment of an expectancy but demands a further act, either reduction to possession or further assignment of the right when it comes into existence").

Under this rule, both the initial Stanford and later Cetus agreements could have given rise only to equitable interests in Dr. Holodniy's invention. And as between these two claims in equity, the facts that Stanford's contract came first and that Stanford subsequently obtained a postinvention assignment as well should have meant that Stanford, not Cetus, would receive the rights its contract conveyed.

In 1991, however, the Federal Circuit, in FilmTec, adopted the new rule quoted above—a rule that distinguishes between these equitable claims and, in effect, says that Cetus must win. The Federal Circuit provided no explanation for what seems a significant change in the law. Nor did it give any explanation for that change in its opinion in this case. The Federal Circuit's FilmTec rule undercuts the objectives of the Bayh-Dole Act. While the cognoscenti may be able to meet the FilmTec rule in future contracts simply by copying the precise words blessed by the Federal Circuit, the rule nonetheless remains a technical drafting trap for the unwary. It is unclear to me why, where the Bayh-Dole Act is at issue, we should prefer the Federal Circuit's FilmTec rule to the rule, of apparently much longer vintage, that would treat both agreements in this case as creating merely equitable rights.

Justice Breyer realized that his argument regarding equitable title had not been briefed by the parties and therefore indicated his preference to remand for briefing of that issue.